The original rationalization for allowing China into the WTO was that it would move China to become a more democratic country with an open market. The policymakers assumed that working interdependently with China would bring greater stability because both countries would be more dependent on each other's fortunes. China would then become cooperative and more honest trading partner and a reasonable competitor.
But it simply did not happen. Instead of becoming more democratic, China under Chairman Xi has intensified the Communist Party's totalitarian power over its people; and is now a big threat to Hong Kong. Instead of becoming an economic partner, they have become an economic destructor—and a threat to U.S, national security. Instead of competing like the U.S. and other industrial nations, they have chosen to compete using predatory mercantilism.
China's "Made in China 2025" plan, according to U.S. Sen. Josh Hawley, is a plan that "seeks to remake the world in its own image and to bend the global economy to its will.” The China plan describes which industries they want to dominate and which technologies they are after to achieve their goals. The problem is that instead of investing in their own technologies, they have developed methods to acquire these technologies through forced technology transfer agreements, IP theft, and industrial espionage. China's version of international trade uses 14 different methods of cheating. But their primary strategies are:
Currency manipulation – China manipulates its currency to keep the U.S. dollar value high, so that Chinese companies have a 30% to 40% cost advantage.
State-owned enterprises (SOE) – China owns and subsidizes many companies that are used to target a market with low-cost products, capture market share and drive competitors out of business.
Technology theft – China knows that technology and innovation are what can make them the No. 1 manufacturer in the world, and they are prepared to get it any way they can. They use a range of illegal methods, from counterfeiting to espionage.
Technology transfer - As a condition of accessing the Chinese markets, China requires U.S. companies that build plants in China to create joint ventures with local companies—and share with them their latest technologies. This gives China easy access to advanced technologies without having to invest in the R&D.
We Allowed This to Happen
America has been complicit in its own demise by politically ignoring China's unfair and illegal strategies for 20 years. Until Donald Trump countered China by imposing tariffs, both Democratic and Republican politicians did nothing to stop China's illegal and unfair policies. We naïvely supported our economic philosophy of free-market capitalism and open markets while China pursued unfair trade. But I think that US politicians have finally accepted that China is not a nation on the road to democracy. China is a totalitarian, monolithic, and nationalistic country controlled by the Chinese Communist Party (CCP).
It was naive of U.S. politicians to think that allowing China into the WTO could change China’s outlook or governance. They are an amoral government that uses predatory mercantilism in its commercial endeavors, and no agreement or negotiation is going to change this fact.
We Have Become Dependent on China
The COVID-19 crisis woke up the American populace to the danger of relying on China for medical products. I don’t think the average citizen had any idea of just how many manufactured goods were transferred to China. It is now clear that the United States is dependent on China for a wide range of products, ranging from medications to computers and electronics. Through an ongoing policy of outsourcing plants and products to China, the United States has allowed China to steal its technologies and take over critical industries.
- Pharmaceuticals and medical products. We found out during the COVID-19 crisis that we could not ramp up production of surgical masks, ventilators, and other needed medical equipment, because they had been sourced from China. We also found out that 80% of active pharmaceutical ingredients come from either China or India. If China shuts the door on exports of medicines and their key ingredients, U.S. hospitals and clinics will cease to function within months. We are very vulnerable, and this is a security issue.
- Mining minerals and metals are the front end of nearly every manufacturing supply chain, from smart phones and computer chips to renewable energy technologies and fighter jets. A recent article in IndustryWeek shows that China now controls 90% of the global supply of rare earth elements which are used everywhere in the digital economy: “We now find ourselves reliant on imports for nearly 50 essential minerals and metals and 100% reliant on imports for 18 of them.”
- China is now the largest supplier of automotive parts and exported $38.4 billion in 2018. The U.S. auto industry has abandoned many of its domestic parts suppliers and is now the largest buyer of Chinese parts of the five countries who have large auto industries. An article in Statista shows that in 2018, the U.S. purchased $11.70 billion in automotive components from China for American assembly plants.
According to the Coalition for a Prosperous America,” between 2002 and 2018, the U.S. manufacturing sector lost 8 points of market share to imports, and import penetration in manufactured goods rose from 23% to 31% of consumption in the U.S. This has resulted in manufacturing losses to imports in 17 out of the 19 subsectors and the loss of 5 million manufacturing jobs.
Will Negotiation Work?
President Trump has tried to negotiate with the Chinese to get them to change some of their unfair advantages. He recently signed a Phase One agreement that attempts to get the Chinese to reduce cheating The language in the Phase One agreement that China signed agrees to criminal enforcement of trade-secret theft, corporate espionage, and counterfeiting. But the enforcement part of the agreement is very vague and only asked that China publish an action plan explaining how it will enforce and deter violations. So far, China has not honored the part of the agreement that agrees to buy $200 billion worth of American products.
I think negotiating with the Chinese communist government is an exercise in futility and there is little chance China will change its methods and policies regardless of an agreement. In testifying recently to the Senate finance committee, U.S. trade Representative Robert Lighthizer said," I don't know if tariffs alone will get them to stop cheating. I know one thing that won't work is talking to them". Dan Dimicco, Chairman of the Coalition for a Prosperous America. Says: "We have been down this road many times before, and Beijing has never actually changed course. The good news is that trumps tariffs are taking a bite out of China's economy.”
If we continue to play the trade game based on China’s rules, we will surely lose,endangering not just our economy but our whole society. The U.S. will lose its position as the No. 1 economy, which will result in slower economic growth, lower wages, further shrinking of our manufacturing sector, greater inequality, and deepening of regional economic problems like those in the Midwest Rust Belt.
We have been through 20 years of China's excuses and promises about agreements, but I think the bottom line is that they can't stop cheating—it is endemic in their leadership. Unless we can make progress in stopping China's illegal and unfair trade practices, we cannot compete with them over the long haul and will lose the economic war. Accepting a status quo with China today means they will eventually take our advanced technologies and dominate our major manufacturing industries, and we will lose.
Decoupling from China
Under these circumstances, the only practical alternative is to begin the process of decoupling from China. This process has already begun with Trump’s tariffs, which should be made permanent. Support for decoupling has also started in Congress with Republican senators like Josh Hawley, Tom Cotton and Marco Rubio and Democratic senators Tammy Baldwin and Mark Warner.
After decades of our government and U.S. multinational corporations advocating the outsourcing of American products and jobs—and touting the advantages of importing cheap Chinese products—it is time to face up to the fact that these policies have led to deindustrialization, lower wages, and a shrinking manufacturing sector.
We need a plan that shows how we can systematically decouple from China—and we should start by assessing our vulnerabilities and declare which industries and technologies are both critical and vital to national security. The plan must also explain exactly how we will:
- Make existing tariffs permanent if all parts of the Phase One agreement are not met.
- Stop China from stealing our advanced technologies
- Support and promote “Buy American” goods.
- Create a blacklist of all Chinese companies that continue to cheat and use the customs agency to prevent their products from being imported to the U.S.
- Declare a list of technologies and products necessary for our national security and describe how they will be protected.
- Describe the incentives for American corporations to reshore their production or find better foreign vendors.
- Assess fines on all State-Owned Enterprises (SOE) that are subsidized by the Chinese government and not allow them to compete in the American economy as long as they are subsidized.
- Stop China from accessing American university research labs or contracting with American scientists on work that affects our national security.
- Stop the method of forced technology transfer of American companies manufacturing in China
Stop the 156 Chinese corporations (as of 2019) listed on the NYSE, Nasdaq and NYSE American from hiding financial information from their investors.
It goes without saying that the many American corporations will probably oppose decoupling, but they are going to be pressured to change because the politics regarding China is changing in the U.S. I think they will cooperate if the government can give them some relief from forced technology transfer and some protection of their products and markets. Big-box retailers like Walmart and Target source many of their products from China and will not want to upset their supply chains. But if the tariffs on the consumer products become permanent, they won’t have any choice but to pass on their prices or find new vendors.
America is at a crossroads. We must stop dealing with China as we hope they would be, and begin dealing with them as they are. The U.S. is in a favorable position in the struggle because China needs our consumer markets more than we need theirs. We are in the beginning of a cold war with China and must defend ourselves just as we did with the Soviet Union. Accepting the status quo like we did for 20 years is no longer an option. Decoupling will be a long, slow, and contentious process; but it is time to face reality and do something for the country, our citizens, and American manufacturing.